Ownership used to be simple. When Joe the farmer owned a cow, his cow was “Joe’s cow”. Joe derived all the benefit from the cow and made all the decisions. Joe sheltered the cow; and it was up to Joe, if he wanted the cow to live long and produce, to provide all of the services needed by the cow. In other words, Joe was not only the owner in name and the beneficiary of the cow’s produce, he also was the custodian and the servicer of the cow.
In the modern economy, these varous facets can be delegated and assigned to different agents. The owner of a limousine might not want the car to be in his name. So he might put the car’s title into a corporate name. When the car is not in use, it might be parked in a local garage for safekeeping. The chauffer might be given the task of deciding when to change the oil and check the tires. So the beneficial owner of the car (the person deriving the benefit of the car and making all final decisions about the car) might not be the owner “in title”, or the custodian, or the servicer of the asset. Those outer manifestations of ownership are no longer evidence of ownership. To visualize this relationship:
owner “in equity”
⇓ ⇓ ⇓
OWNER “IN TITLE” CUSTODIAN SERVICER
I. Owning in Title vs. Owning In Equity
It is easy to understand the concepts of “custodian” and “servicer” since these are everyday concepts. But it is not so easy to understand the difference between “owning in title” and “beneficial ownership” (a/k/a “equitable ownership”) because it is natural to think that the named owner is the person controlling and enjoying that asset. But the person enjoying the fruits of an asset – such as the fruit of the tree, the interest from a bond, the dividends and capital appreciation of stocks – often does not want to be identified. And so the “named” owner, also known as the owner “in title”, might only be an agent of the “beneficial owner” (a/k/a the owner “in equity”).
II. Who decides?
Another level of confusion comes from the fact that the decsion maker might be the title owner, or the beneficial owner, or a third party! Here is an example of the division or title and equity, and how control shifts across the three parties. Mr. Steel sets up a trust into which he places all the shares of his company. He hires a lawyer to be the trustee of the trust. The beneficiaries are the three minor children of Mr. Steel. At first, Mr. Steel keeps complete control. All decision making powers remain with him. The trustee lawyer holds the shares in his name, for which he earns a fee. All the benefits of the shares accrue to the three minor children. When Mr. Steel sets up the trust, he instructs the trustee to take full control when he dies. A final instruction from Mr. Steel states that decision making powers transfer to the three children, after the youngest child turns 25:
DECISION MAKER OWNER IN TITLE OWNER IN EQUITY
1. MR. STEEL IS ALIVE Mr. Steel Lawyer Trustee holds Three minor children
the shares in his name
2. Mr. STEEL DIES Lawyer Trustee Lawyer Trustee holds Three minor children
the shares in his name
3. YOUNGEST TURNS 25 Three children Lawyer Trustee holds Three children, now
the shares in his name adults
So we see that while the “owner in title” is always the Lawyer Trustee, and while the “beneficial owner” is always the three children, the decision making powers transferred from the original owner, (Mr. Steel) to the Lawyer Trustee, and finally to the three children.
In a modern economy, the owner is free to mix and match the various assignments and decision making powers. The servicer might be the custodian (e.g. the chauffer might park the limo at his house at night); the owner in title might be the servicer (e.g. the trustee might be responsible for periodical oil changes); and the owner in title might be the custodian. In sum, the owner has the flexibility to hire agents as he chooses, for the time period he chooses, and for the assignments that he chooses.
III. “Holding” vs. “Possession”
One final problem concerns two outdated terms: What does “holding” a note mean? How about “possessing”? Since a note is either payable to the bearer, or endorsed to the person in possession, the physical act of holding the note once was the equivalent of ownership. But as we saw above, the owner might not want to be in possession of the note and/or might not want the note to be in his name. Yet the term “holder” is so ingrained in law and finance that they use it to mean “owner” even if the owner does not actually hold the note.
Furthermore, the problem with the term “holder” is that it means different things to different courts, legal scholars and practitioners of law. For instance, Florida Statute uses the term “non-holder in possession”. In a non-legal setting that phrase would be considered self contradictory, even absurd. How can the possessor not hold that which he holds? Different courts interpret the term in different ways. For instance, in Vermont courts, the non-holder in possession is the buyer (the owner in equity) of a note that has not been endorsed. In other words, the “non-holder in possession” is the equitable owner. But Florida courts (in Taylor vs. Deutsche Bank) used the term “non-holder in possession” to mean the party in possession (the title owner) and not the beneficial owner (the owner in equity). So it is up to the reader to decipher from context whether “holder” means owner-in-title and/or owner-in-equity and/or party in possession. The term is being used to mean any and all of those three labels.
Now we can put all of these pieces together and explain what MERs does.